Portugal’s austerity plan fails to deliver
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Since Portugal asked for an international bailout exactly two years ago, Pedro Passos Coelho, the prime minister, has been one of Europe’s staunchest upholders of the faith that austerity will deliver growth – and relatively quickly.
After winning office in June 2011, he said a “rigorous programme of austerity and structural reform” would result in two “terrible years” of deep recession and record unemployment, but would also return the country to growth and win back the confidence of international investors.
His forecast of two years of suffering has proved wholly accurate. But instead of the promised recovery, the Portuguese find themselves facing a much deeper and longer recession than the government or international lenders had foreseen.
Portugal’s painful adjustment programme has also failed to deliver the fiscal consolidation that Mr Passos Coelho has described as a precondition for “sustainable growth, competitiveness and employment creation”. The budget deficit widened from 4.4 per cent of national output in 2011 to 6.4 per cent last year.
This year’s deficit target – originally 3 per cent of output – has twice been relaxed and now stands at 5.5 per cent. But the constitutional court’s decision to reject planned austerity cuts means Lisbon may have to ask for even more leeway. Public debt is forecast to peak at 124 per cent in 2014, higher and later than initially projected.
For the prime minister’s many critics – which include employer’s organisations and prominent figures within the two governing parties – this lack of results is evidence that the bailout programme is not working. Uncompromising austerity, they say, is not only choking off any potential for growth, but also hitting tax revenue, meaning government’s self-confessed “enormous” tax increases are failing to make a sufficient impact on the deficit.
In a hard-hitting editorial encapsulating this view, Público, a leading daily newspaper, wrote in February: “Portugal has entered a recessionary cycle. People have no reason to believe the future will be any better. The [adjustment] programme has failed and has to be changed.”
If the programme is failing, as so many in Portugal believe, Mr Passos Coelho cannot blame the troika of international lenders – the European Commission, the International Monetary Fund and the European Central Bank – for foisting an unworkable solution on a reluctant government forced to accept tough reforms in return for a €78bn rescue.
On the contrary, from the outset the prime minister has affirmed himself as a true believer in the fiscal orthodoxy advocated by the troika, Germany and other northern eurozone members, promising to go beyond what was required, privatising more companies than stipulated and seeking to hit deficit-reduction targets ahead of schedule.
“We do not view these reforms as an imposed obligation,” he wrote in the Financial Times a year ago. “If we were not operating under a bailout programme, Portugal would still be in dire need of reform for the sake of its own future. By implementing these reforms, trade and investment will follow, growth will come and debt and interest rates will fall.”
Mr Passos Coelho has been true to his word in implementing the adjustment programme to the letter, consistently winning praise in the troika’s quarterly progress reports. In March, Víctor Gaspar, the finance minister, produced graphs showing Lisbon had executed 92 per cent of the bailout measures required to date.
“The [rescue] programme is very ambitious and we don’t believe the government can do more,” Peter Weiss, a European Commission economist, said a year into the bailout. “Whether Portugal is able to convince the markets is, of course, another matter.”
In fact, after a shaky start when many investors were convinced Portugal would have to follow Greece in seeking a second bailout, Mr Passos Coelho’s solid commitment to reform – and the assurance given by the ECB last July that it would do “whatever it takes” to preserve the eurozone’s integrity – have seen yields on Portugal’s benchmark 10-year bonds fall below 6 per cent from a peak of more than 17 per cent early last year.
The prime minister can also claim a significant success in reducing the current account deficit from an unsustainable 10.4 per cent of national output in 2010 to just 0.3 per cent this year, with a surplus forecast for 2014. The IMF has also praised Lisbon for achieving an estimated 6 per cent adjustment in the primary structural budget deficit, which excludes interest payments and extraordinary items, over the past two years.
Portuguese exports have also surged during Mr Passos Coelho administration, increasing 5.8 per cent last year, with 20 per cent growth outside Europe. But the deeper-than-expected European downturn will see export growth slow to 0.8 per cent this year.
For the prime minister, it is the poorly performing European economy that has blown his reform plans off course, aggravated by troublesome crosswinds such as Friday’s constitutional court ruling. But for his growing number of Portuguese critics, he has been navigating the wrong route from the start.
Judges set limits on cuts
Wearing black robes and solemn expressions, the 13 judges of Portugal’s constitutional court looked uncomfortable in the glare of the television lights.
They had kept the media waiting for hours – and the country for three months – before delivering a ruling on Friday night that has defined legal limits to austerity measures and set clear precedents.
In rejecting a proposed cut in public sector pay – by removing one of the 14 “months” in which annual salaries are paid in Portugal – the judges, 10 of whom are elected by parliament, have determined the extent to which fiscal policy can discriminate between state and private sector workers or pensioners.
After a similar decision last year, Portugal’s international lenders argued that differentials between public and private sector pay were higher in Portugal than in many other European countries and that state employees enjoyed greater job security. This, they reasoned, justified cutting wages. In response, the court ruled that while some discrimination was acceptable, it must be limited.
The court’s rejection of cuts in sickness and unemployment benefits, which came into force in January and must now be repaid, determined cuts cannot go beyond a certain level.
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